June 12, 2017
Over the weekend, Goldman – whose “FAAMG” report was one of the catalysts to the Friday “tech wreck” rotation out of tech/growth/momentum and into value/energy – warned that the pain may not be over, simply because the outperformance of strong balance sheet companies – usually tech-linked names that have little or no debt and substantial cash flow – in a 10%+ equity market rally is rare; occurring in only 5% of six-month stretches in the last 30 years, and warning that “the last such notable episode was in 2000, at the Tech Bubble peak.”
This morning it was JPM’s turn to opine on Friday’s events, only not on the cause of the mauling, but why we got to where we are. As JPM’s macro strategist Adam Crisafuli writes, “tech will remain under pressure – the space has become overcrowded w/a lot of lazy/complacent money chasing momentum and these weak hands can be quick to exit – that departure process usually takes longer than just a few days.”
Here is his full note.
What’s happening this morning? Stocks fell pretty much throughout Asia and prices are weak in Europe too. The US futures are down ~6 points. US TSY yields are flattish while 10yr yields are down in France and Italy following weekend political developments (the UK political situation remains very fluid although this really isn’t impacting anything beyond the shores of that country). Crude has a small bid following some encouraging news out of Qatar (Qatar remains committed to the production agreement and Kuwait is hopeful on a resolution to the current regional friction).
The big story Mon morning is price action (instead of news) as the US tech wreck from Fri afternoon cascades around the globe, weighing on IT stocks in Asia and Europe. Blue chip tech stocks were hit throughout Asia, including South Korea (Samsung Electronics -1.5%, NAVER -6.7%, LG Display -4.9%, Hynix – 1.3%), Taiwan (TSMC -2.12%, Hon Hai -2.8%, ASE -2.2%, Largan -0.72%), and HK (AAC Tech – 3.7%, Tencent -2.5%).
Eurozone tech stocks are getting hit too (the SX8P tech index is down >3%, led on the downside by AMS AG, STM, ASM Int’l, Dialog Semi, ASML, Logitech, etc.). The US tech carnage on Friday wasn’t so much a function of fundamentals (which remain healthy) but instead a return to the Nov/Dec ’16 post-Trump reflation playbook (which is why bank stocks did very well in the US last week) as a series of American political developments could help pave the way for pro-growth policy upside surprises in the months ahead. While the odds of a corporate tax bill may be higher than investors anticipated at the start of last week, the ultimate rate cut won’t be as dramatic as initially hoped (~27-28% instead of 15-20%) and the other pieces of the pro-growth agenda (individual tax cuts, large-scale infrastructure spending, legislative deregulatory actions) are unlikely to make it to Trump’s desk.
Meanwhile while tech will remain under pressure (the space has become overcrowded w/a lot of lazy/complacent money chasing momentum and these weak hands can be quick to exit – that departure process usually takes longer than just a few days) it’s unlikely banks will receive the required cooperation from Treasuries (higher yields and a steeper curve) for the BKX to hit fresh highs. Note that AAPL was hit w/its second d/g in as many weeks this morning (Mizuho cuts from Buy to Neutral; this follows the d/g from Pac Crest last Mon 6/5).
This article was posted: Monday, June 12, 2017 at 8:29 am